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Expect a strong economic recovery: Westpac

Monday 18th January 2010

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New Zealand's economic recovery will be stronger than most economists are forecasting, with growth likely to top 4% next year, said in its quarterly economic overview.  

While the global financial crisis could mean a different kind of recovery, Westpac's economics team suggests there is too much store being placed in that analysis, especially when so many of the factors now at play look the same or better than recoveries in the past.

Westpac's forecast of a 3.7% rate of growth in gross domestic product this year, and 4.3% in 2011, is at the top end of the 16 forecasters the bank monitors, and it's happy with that.

"We find that recoveries from past recessions have tended to be very strong," said Westpac's chief economist, Brendon O'Donovan. "On average, New Zealand GDP (economic) growth peaks at 6% per annum nine quarters after the recession has ended.”

"What is startling is how many favors are currently shaping up similar to that experienced in previous strong recoveries,” he said. “That would suggest that the risks to our forecasts are weighted more to the upside than the downside."

 Among factors looking similar or better than in previous recoveries, Westpac listed:

  • A deep recession to start with;
  • Asset prices, particularly housing, rebounding strongly;
  • A mini-boom in migration is under way;
  • World economic forecasts keep being revised upwards, led by Asian economies rather than Europe or the USA on this occasion;
  • A dramatic shortfall in new houses being built;
  • Unusually deep de-stocking, meaning firms will have greater inventory re-stocking needs.  Inventories fell in mid-2009 by the greatest extent since records began in 1987;
  • Reduced consumption mainly affected durable goods, especially cars.  If and when spending returns to more normal patterns, these categories fuel a bounceback;
  • Leading indicators including the interest rate outlook (rising), business and consumer confidence are "if anything, stronger in those most other economic recoveries".

While credit, employment and mortgagee sales data would continue to look weak for some months yet, they were all late signals from the last impacts of the recession on firms and households that had hung on as long as possible, but failed late in the downturn.

The global financial crisis was severe for world banking, there was no banking crisis in New Zealand and the terms of trade had returned swiftly to robust levels, reflecting demand for agricultural and other commodities from fast-growing Asian countries, where New Zealand was signing an increasing number of trade liberalisation deals that would assist growth.

"Simple arithmetic would suggest a stronger than usual rebound," O'Donovan said.

Westpac expects a substantial improvement in parts of the economy that are exposed to domestic recovery, singling out construction, publishing and advertising, transport and sectors supporting oplant and machinery investment, and consumer durable goods.

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